A 100% Offset Account is a normal everyday transaction account that is linked to your home loan which can reduce the interest charged. A full offset means that 100% of the funds in your offset account will be deducted from what you owe on your home loan before interest is calculated.
The run down on offset accounts:
- They are transactional and can be used for salary credits, ATM & EFTPOS withdrawals
- Accessible with internet and phone banking just like any other savings or transaction account
- They do not earn any interest
- They have no minimum balance requirements
- Must be an account held at the same bank as your home loan
- Must be in exactly the same name as the home loan – If joint loan then must be joint savings account
- Usually only available with variable rate loans but a small number of banks allow them on fixed rates
To understand how 100% offset accounts work, you first need to understand how banks calculate interest.
Using the same example of $350,000 loan at 4.50% rate this time with $20,000 in a 100% offset account.
(Loan Balance – Offset Balance) X (Annual Rate/365) = Daily Interest
($350,000 - $20,000) X (4.50% / 365) = Daily Interest
$330,000 X 0.0123287% = Daily Interest
$40.68 = Daily Interest
This is done every day. At the end of a 30 day month, the total daily amounts $1,221 is debited to the loan so the loan balance becomes $351,221.
The normal monthly payment of $1,774 is still made and loan balance then starts day 1 of the next month at $349,447.
$349,447 - $20,000 X 0.0123287% = $40.62
This may not seem like much but you have saved $2.47 a day. Over 12 months that’s a saving of approximately $900.
Be careful, some offsets come with extra fees and higher rates. Here is a real example of the difference in one lenders products.
| $350,000 Loan with $20,000 in Offset | Basic no offset | With Offset |
|---|---|---|
| Interest Rate | 4.10% | 4.65% |
| Monthly Fees | $0 | $33 |
| Daily Interest | $39.31 | $44.59 |
| Monthly Cost (interest + fees) | $1,179.30 | $1,370.70 |
| Monthly Offset Benefit | $0 | $76.44 |
| Net monthly cost | $1,179.30 | $1,294.26 |
*$50,000 is the min balance needed to be better off with offset in this example
This example does not apply in all situations but it does highlight the potential downsides to 100% offset accounts.
